1. What is accounting?

Accounting is the systematic process of measuring the economic

activity of a business to provide useful information to those who make
economic decisions. In other words, it is the process of recording
financial transactions pertaining to a business. 
Accounting is one of the key functions for almost any business. It may
be handled by a bookkeeper or an accountant at a small firm, or by
sizable finance departments with dozens of employees at larger
companies. The reports generated by various streams of accounting,
such as cost accounting and managerial accounting, are invaluable in
helping management make informed business decisions. 

2. What are the different types of businesses?

These are the basic forms of business ownership.
 Sole Proprietorship: A sole proprietorship is a business owned by
only one person. It is easy to set-up and is the least costly among all
forms of ownership. The owner faces unlimited liability; meaning, the
creditors of the business may go after the personal assets of the
owner if the business cannot pay them. The sole proprietorship form
is usually adopted by small business entities.
 Partnership: A partnership is a business owned by two or more
persons who contribute resources into the entity. The partners divide
the profits of the business among themselves. In general
partnerships, all partners have unlimited liability. In limited
partnerships, creditors cannot go after the personal assets of the
limited partners.
 Corporates: A company is an incorporated association which
is an artificial person created by law, having a corporate and
legal personality distinct and separate from its members,
perpetual succession and common seal. A company is
managed by its board of directors who is responsible for
reporting to the various interest groups of the company about
its financial performance and state of affairs.
 Public Limited Company – The company listed in Stock
Market; whose shares are freely traded.
 Private Limited Company – The company not listed in Stock
Market and there are restrictions on exchange of shares.
 Co-operative Society: A cooperative is a business organization
owned by a group of individuals and is operated for their mutual
benefit. The persons making up the group are called members.
Some examples of cooperatives are: cooperative banking, credit
unions, and housing cooperatives.

3. What is the need for accounting?

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 Presenting specified financial information in prescribed formats and
under specified guidelines to stakeholders is a mandatory requirement
of the law. But apart from that, we need accounting because it’s the only
way for business to grow and flourish. Accounting is the backbone of
the business. It helps the business grow in a way that can be measured
and predicted. Having a system of tracking the business’s assets /
liabilities / incomes / expenses helps to make informed decisions based
on past & present health of the company.

4. What are the types of accounting?

Accounting information can be helpful in a number of situations. In fact,
the field of accounting consists of several specialty areas that are based
on the nature of the decision.

Financial Accounting:
Financial accounting involves recording, classifying and summarizing of
past events and thus is historical in nature. It ascertains profit earned or
loss incurred during a period (usually one year as accounting year) and
the financial position as on the date when the accounting period ends.
The main purpose of financial accounting is to provide information about
a firm’s performance to external parties such as investors, creditors and
tax authorities. It is performed according to GAAP guidelines.
This information is of immense vitality but does not aid the management
in efficiently planning, controlling and organizing the business.

Cost Accounting:
Basic data for cost accounting is also collected from the records kept for
financial accounting purpose. The aim of cost accounting is to arrive at
the cost of the product manufactured by a company. Besides this it
shows classification and analysis of costs on the basis of functions,
processes, centers, etc. Heads of these departments are held
responsible for keeping these costs under control. It thus helps in cost
computation, cost saving and cost reduction.

Management Accounting:
The management of a company makes numerous decisions.
Accounting analyzes the environment of the business and advises the
management about the decision in the given situation. Management
Accounting takes the data from both cost accounting and financial
accounting. It is for internal decision making and does not have to follow
any rules issued by standard-setting bodies. It only needs good
management information system for helping management to take
effective decisions. Decisions are made not only on the basis of cost but
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 also considering social, political and market factors. Therefore, it may
happen that final decision could be different than one recommended by
cost analysis. Whatever, may be the final decision, one needs to clearly
know its cost implication.

5. What is the process of accounting?

As already discussed, accounting is the systematic process of
measuring the economic activity of a business to provide useful
information to those who make economic decisions. How does
accounting accomplish this? This is best understood by commonly
accepted definition of accounting: “Accounting is the art of recording,
classifying and summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least, of financial
character and interpreting the results thereof.”
The art of recording involves putting into writing or in print the
transactions of financial character, reasonably soon after occurrence, in
the records maintained by the company, e.g. cash book, day books,
journals, memoranda books, etc. This part of accounting is essentially
concerned with not only ensuring that all business transactions of
financial character are in fact recorded but also that they are recorded in
an orderly manner. The art of keeping a permanent record of business
transactions is book keeping.
The art of classifying is concerned with the systematic analysis of the
recorded data so that items of like nature are classified under
appropriate heads. This accounting classification is usually done by
maintaining ledgers with individual account heads under which all
financial transactions of similar nature are collected.
The art of summarizing in a significant manner consists of presenting
the classified data in a manner which is useful to the internal and
external end-users of accounting statements. At the end of stipulated
periods (usually a month for internal purposes and a year for external
reporting purposes as required by corporation law), will be balanced as
at the end of that period. The accountant will check (or “try”) the
accuracy of the accounts by preparing a trial balance of all ledger
accounts as at the end of that period. This process leads to the
preparation of financial statements like the Balance Sheet, Income
Statement (or Profit and Loss Account as it is often called), Source and
Application of funds statement, cost statements, internal reports to
management, etc.

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 The final function of accounting is the interpretation of the summarized
data in such a manner that the end-user can make meaningful
judgments about the financial condition or the profitability of the
business operations or can use the data in preparing future plans and
laying down polices to execute such plans.
Once a business transaction occurs, a sequence of activities begins to
identify and analyse the transaction, make journal entries, etc. Because
this process repeats over transactions and accounting periods, it is
referred to as the accounting cycle.
6. Who are the users of Accounting information?
There is a general approbation at the international level that external
users of the financial statements include---
i) Present and potential shareholders,
ii) Lenders,
iii) Suppliers and other creditors,
iv) Government, its agencies and other regulatory authorities,
v) Employees and labour unions,
vi) Customers,
vii) Financial Analysts and advisors,
viii) The Public.
Financial Statements’
Users

Internal Users External Users

Management Group Financing Group Public Group

 Board of  Investors  Government
Directors  Lenders Agencies
 Managers
Present and Potential  Suppliers  Employees
 Partners  Customers
 Officers  Others like-
academicians,
Investors
researchers,
analysts, etc.
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They need information primarily to aid their decisions of buying, selling or
holding shares of the reporting entity. Of course, the shareholders, who hold
relatively larger block of shares sufficient to influence composition of the board
of directors, also need information to assess effective stewardship by the
existing management. In other words, a large shareholder needs information
to take decision whether to continue with the existing management.
Lenders
The lending decision involves two issues: whether or not credit should be
extended, and the specification of a loan’s terms. Lenders (like banks and
financial institutions) may have interest in the reporting entity either in the
short run or in the long run depending on the period of their credits. In general,
lenders look into debt servicing capability of the enterprise both in terms of
timely repayment of principal and interest. Long term lenders are more
concerned with solvency of the reporting entity, whereas short term lenders
are primarily interested in liquidity, current profitability and operational cash
flow.
Suppliers and other creditors
Suppliers often sell on credit, and they must decide which customers will or
will not honour their obligations. Suppliers and other creditors are generally
interested in the reporting entity in the short run, and their interest is normally
restricted to the ability of the reporting entity to maintain payment cycle which
is determined by liquidity and operating cash flow position. In case the
suppliers and other creditors have developed long term supply relationship
with the reporting entity, then they get concerned about solvency also.
Government, its agencies and other regulatory authorities
Central and state governments regulate a large array of business activities.
They have multiple purposes to look into the corporate financial statements:
- To observe compliance with laws and regulations;
- To collect revenue by way of taxes;
- To grant subsidy;
- To review employment opportunities, resource allocation, fiscal policies
and other macro-level decisions.
Employees and labour unions
Employees and their representative bodies are interested in the financial
statements to ascertain ability of the reporting entity to maintain the existing
staff and service them through appropriate remuneration, promotion and
retirement benefits. Financial statements help the managers in setting product
prices and in taking decisions like buying or leasing equipment. Sometimes
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the employees may have the dual roles as shareholders as well as
employees.
Customers
The customers of a business are interested in a stable source of supply. They
can use financial statements to identify suppliers that are financially sound.
Like suppliers and other creditors, customers may also have either short term
or long-term interest in their reporting entity. In case of short-term interest, a
customer may simply be satisfied with the information relating to liquidity,
current profitability and operational cash flow. If a customer has long term
interest in the reporting entity, he would rather prefer to analyse solvency and
its ability to continue as a going concern.
Financial analysts and advisors:
Financial analysts, researchers and market survey agencies are also
interested in the corporate financial statements with a special and limited
purpose concerning their area of analysis, research or survey. Many investors
and creditors seek expert advice when making their investment and lending
decisions. These experts use financial statements as a basis for their
recommendations.
Public
The public at large are interested in continuance of the reporting entity for its
contribution in the local economy through protection of the present level of
employment, creation of new employment opportunities, promoting ancillaries,
facilitating various development schemes, etc.

Users’ Information Need

Three important financial characteristics in which almost all the user-groups
have general interest, of course, for different reasons, are solvency, liquidity
and profitability. Solvency indicates ability of the reporting entity to meet its
obligations in the long run and to continue operations at least in the same
scale in the foreseeable future. Liquidity indicates ability of the reporting
entity to meet all its current obligations as and when fall due. In other words,
liquidity implies short term solvency. Profitability indicates earning capability
of the reporting entity either in relation to revenue or assets or capital
employed.

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